Distribution free bounds for service constrained (Q, r) inventory systems

Abstract

A classical and important problem in stochastic inventory theory is to determine the order quantity (Q) and the reorder level (r) to minimize inventory holding and backorder costs subject to a service constraint that the fill rate, i.e., the fraction of demand satisfied by inventory in stock, is at least equal to a desired value. This problem is often hard to solve because the fill rate constraint is not convex in (Q;r) unless additional assumptions are made about the distribution of demand during the lead-time. As a consequence, there are no known algorithms, other than exhaustive search, that are available for solving this problem in its full generality. Our paper derives the first known bounds to the fill-rate constrained (Q;r) inventory problem. We derive upper and lower bounds for the optimal values of the order quantity and the reorder level for this problem that are independent of the distribution of demand during the lead time and its variance. We show that the classical economic order quantity is a lower bound on the optimal ordering quantity. We present an efficient solution procedure that exploits these bounds and has a guaranteed bound on the error. When the Lagrangian of the fill rate constraint is convex or when the fill rate constraint does not exist, our bounds can be used to enhance the efficiency of existing algorithms. c 2000 John Wiley & Sons, Inc. Naval Research Logistics 47: 635{656, 2000